5 Chemical Stocks To Enrich Your Portfolio Before Q3 Earnings
Zacks Investment Research | Oct 12, 2017 06:31AM ET
The chemical industry has so far enjoyed a positive run this year, helped by an upswing in the world economy and continued strength across major end-use markets such as construction, electronics and automotive.
The Zacks Chemicals Diversified industry has outperformed the broader market year to date. The industry has gained around 22.6% over this period, higher than S&P 500’s corresponding return of roughly 14%.
Notwithstanding a few headwinds including the impact of the devastating Hurricane Harvey, chemical companies are expected to continue the earnings momentum witnessed in the second quarter into the September quarter as the fundamental driving factors remain firmly in place.
Strategic Actions to Reap Margin Benefits
Strategic measures including productivity improvement, pricing actions, portfolio restructuring and earnings-accretive acquisitions are expected to drive the performance of chemical makers in the third quarter. Cost-cutting measures and productivity improvement actions by chemical companies should continue to yield industry-wide margin improvements in the September quarter.
Chemical companies also continue to shift their focus on attractive, growth markets in an effort to whittle down their exposure on other businesses that are grappling with weak demand. Moreover, they remain actively focused on mergers and acquisitions to diversify and shore up growth. Synergies from acquisitions should lend support to earnings in the third quarter.
Moreover, a number of chemical makers are taking appropriate pricing actions (reflected by hikes in chemical prices in the recent past) in the wake of a sharp rise in raw materials costs. This is also expected to support their margins in the third quarter.
Strength Across Key End-Markets
Chemical makers continue to see strong demand from construction and automotive sectors – major chemical end-use markets. The automotive sector continues its good run, supported by an improving job market, rising personal income, improved consumer confidence, low fuel prices and attractive financing options.
A recovery across housing and commercial construction markets has been another tailwind for the chemical industry. The underlying trends in the housing space remain healthy, backed by steady buyer demand, low mortgage rates, rising rent costs and easy loan availability.
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Harvey-Stoked Disruptions Pose a Concern
Hurricane Harvey weighed on U.S. chemical production during the third quarter, knocking off a sizable chunk of production capacity. The U.S. chemical industry saw flat production in August as activities in the Gulf Coast were interrupted by Harvey, according to a recent report from the American Chemistry Council (ACC), a chemical industry trade group.
The Gulf Coast is the epicenter of the U.S. specialty chemicals and petrochemicals industry. Harvey led to the shutdown of several chemical plants along the Gulf Coast.
In particular, the storm ravaged Texas that accounts for nearly three-quarters of the U.S. production of ethylene, which is among the world’s most important petrochemicals and a basic ingredient for final products ranging from plastic bottles to tires to polyester fabric. Many chemical plants producing ethylene are located near the Gulf Coast’s concentration of petroleum facilities.
According to IHS Markit, 54% of total U.S. ethylene production capacity was hit by Harvey. A number of major chemical producers had to shutter or cut back ethylene production, leading to reduced supply of this major chemical. As such, the impacts of disruptions caused by Harvey may pose some earnings headwinds for U.S. chemical makers in the September quarter.
Picking the Winning Stocks
While the chemical industry still remains saddled by a few challenges, the industry’s momentum is expected to continue in the third quarter on continued strength across major end-markets. Amid such a backdrop, a sneak peek at the space for some potential winners backed by a solid Zacks Rank could be a great idea for investors looking to gain from the third-quarter earnings season.
With the help of the Zacks Investment Research
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